Black Tuesday

What it is:

Black Tuesday refers to October 29, 1929, when panicked sellers traded nearly 16 million shares on the New York Stock Exchange (four times the normal volume at the time), and the Dow Jones Industrial Average fell -12%. Black Tuesday is often cited as the beginning of the Great Depression.

How it works/Example:

The years before Black Tuesday were filled with irrational exuberance. The Dow Jones Industrial Average nearly doubled, rising from 191 in early 1928 to 381 by September 3, 1929. Stock prices had risen across the board, even for companies that posted little profit. Prices then began falling slightly, as investors started to take profit.

On October 10, 1929, the Dow Jones Industrial Average closed above 350 for the first time in ten trading days. This rally sparked profit taking, and the Dow Jones Industrial Average began falling again amid the selling.

The selling became intense on Wednesday, October 23, and the market fell -6.3%. By October 24, Black Thursday, the selling frenzy reached a critical mass and by Black Tuesday it turned to flat-out panic.

The trading volume got so high that it delayed the ticker tape by more than an hour, which created confusion and anxiety. Some exchanges were so overwhelmed that they closed early. The Dow Jones Industrial Average closed at 230.07 on Black Tuesday.

From Black Thursday to Black Tuesday, stocks lost more than $26 billion in value and over 30 million shares traded. After that dismal week, prices continued to fall, wiping out an estimated $30 billion in stock value by mid-November 1929.

Black Tuesday is often associated with stories of investors and traders jumping out of windows after losing everything. Black Tuesday and the days surrounding were especially painful for investors who had borrowed money to purchase stocks that had become worthless or close to it.

The situation influenced what became a major turning point for the U.S. economy, because many of these borrowers, who had leveraged themselves considerably in an effort to participate in the bull market, were ruined financially. They had to sell everything to pay back their debts, and many couldn't pay them back at all. Thousands of banks failed as a result. Businesses closed, as they were unable to get credit, and the nation's disposable income fell precipitously.

Why it Matters:

Historians often cite Black Tuesday as the beginning of the Great Depression because it marked not only the end of one of the nation's greatest bull markets, but the end of widespread optimism and confidence in the U.S. economy. Many investors had equated the health of the stockmarket with the health of the economy, but Black Tuesday challenged this premise.

As with many market reversals, the causes are numerous, intertwined, and controversial. For example, many cite the September 1929 passage of the Smoot-Hawley Tariff Act, which placed high taxes on many imported items, as a major contributor to the market's instability. Others note the huge amount of leverage investors had used to buy stocks, and some cite the scandal-ridden recall of British funds invested in the U.S. and the September 26 spike in the Bank of England's discount rate.

Besides the dramatic effect on investor psychology, the events of Black Tuesday contributed to the creation of a variety of new laws, organizations, and programs designed to improve the country's infrastructure, further social welfare, and prevent corporate fraud and abuses. These included the establishment of the Federal Depository Insurance Corporation (FDIC) and the passage of the Securities Act of 1933, the Glass-Steagall Act of 1933, the Securities and Exchange Act of 1934, and the Public Utility Holding Act of 1935. The panic caused by information delays also spawned faster ticker systems that could handle heavy trading days.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.

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